The profit prescription

Springfield health-care providers are in the money

Four years ago, Springfield Clinic had fewer than 140
physicians. Today the number sits at 175, and it’s about to
grow. Thanks to a $30 million expansion project approved last week by the
city, Springfield Clinic will soon have room for 40 more doctors. Shortly
after the ribbon is cut in two years, the clinic is expected to have 220
physicians on the payroll. Although ground hasn’t yet been broken on the
just-approved building, a brand-new Springfield Clinic building opened on
Monday next to Memorial Medical Center. The new building, which is owned by
the medical center and leased to the clinic, will reduce the number of
satellite offices and further the clinic’s goal of consolidating its
physical locations. There is room for five to seven new doctors. The planned new building, which will be almost as big
as existing headquarters on south Fifth Street, is mainly known for the
three stories of glassed-in space that will be built over south Sixth
Street to connect the old with the new. Equally staggering, however, is how
the project will be financed. Half of the money, $15 million, will come
from cash flow; the balance will be borrowed. “We don’t live
paycheck to paycheck,” says Randy Bryant, the clinic’s chief
financial officer. Indeed. Springfield Clinic’s meteoric growth
underscores just how big of a business health care has become in the
capital city. As a private entity, the clinic’s books aren’t
open to the public — but take a glance at the balance sheets of the
city’s nonprofit hospitals, which must publicly disclose their
finances as a condition of receiving tax exemptions: For a nonprofit, Memorial Medical Center does a
pretty good job of making money. In fiscal year 2004, the most recent year
for which figures are available, Memorial took in slightly more than $336
million in revenue, which exceeded expenses by $20.7 million, according to
records filed with the Internal Revenue Service. That’s not unusual.
During the past seven fiscal years, Memorial has lost money just once. All
told, Memorial’s revenue during those years has exceeded expenses by
$95.6 million. It has built up a reserve of nearly $152 million, and
revenue climbs steadily each year. In 1998, Memorial took in $253 million,
$83 million less than it collected in 2004. St. John’s Hospital, which hasn’t lost
any money in the past seven years, has done even better. During fiscal year
2004, revenue was $384.2 million, outstripping expenses by a whopping $51.5
million, even though the hospital wasn’t reimbursed for nearly $17.5
million in care provided to the poor. The hospital also did well the
previous year, when revenue exceeded expenses by nearly $51.6 million.
According to financial statements given to the state attorney
general’s office, revenues once again exceeded expenses by more than
$50 million in the fiscal year ending in June 2005. With nearly $563 million in reserves, St.
John’s has enough money to build the new Busch Stadium in St. Louis
and the Thompson Center in Chicago with enough left over to make the entire
payroll of the Florida Marlins, even if the team persuaded the Cubs to hand
over ace pitcher Greg Maddux. Such numbers don’t surprise Dr. Quentin Young
of Chicago, who says that America spends too much on bricks and mortar and
not enough on folks whose medical needs go unmet because they don’t
have insurance. Capital expenditures for health care in the United States
are twice those of Switzerland or Germany, he says, two nations that boast
significantly higher life expectancies and other statistical indicators of
quality medical care. He bemoans a dog-eat-dog world of medical care in
which nonprofit hospitals emulate their for-profit competitors, complete
with marketing departments and advertising budgets that can run well into
the six figures. “I bet if you turn on the television in
Springfield, you’ll see ads for hospitals,” says Young, who is
a volunteer for Physicians for a National Health Plan and a clinical
professor of preventative medicine at the University of Illinois medical
school in Chicago. Sick people today, local providers say, expect more
than ever. For example, a hospital bed that cost $100,000 in capital
expenses in the 1950s now costs $1 million (in inflation-adjusted dollars),
says Mitch Johnson, senior vice president of marketing and planning at
Memorial Medical Center. It is no longer acceptable to treat patients in
16-bed bays with privacy curtains. “For any new facilities, the state
of the art is private rooms, and not only private rooms, but big private
rooms with room for families to stay overnight,” he says. The next
big push for Memorial, he adds, will likely be investment in rooms. “It’s competitive, no question about
it,” says Michael Boer, president of the Springfield Medical District
and a past president of the Greater Springfield Chamber of Commerce. Now a
bank president, Boer says that health care has taken the place of
government and the retail sector in the economic matrix of Springfield. “Health care is, as I’ve said many times,
our growth industry right now,” Boer says. Certainly Springfield isn’t alone when it
comes to a burgeoning health-care industry. “The same thing is happening in other
metropolitan areas as well,” Boer notes. After tough times in the
late 1990s, profits are up nationally for health-maintenance organizations.
According to Weiss Ratings, a Florida company that tracks health-insurance
companies and analyzes their creditworthiness, HMOs in the United States
made $7 billion in profits during the first half of 2005, a 21 percent
increase over the same period in 2004. According to a January study
commissioned by the American Association of Health Plans, health-insurance
companies of all kinds have a 3 percent return. Springfield Clinic is a de
facto HMO. It serves Health Alliance
members in the Springfield area, keeping 85 percent of premiums and sending
the remaining 15 percent to Health Alliance for administrative costs.
Anything left over after patient care has been paid for is profit. Since
1999, Springfield Clinic has been a partner with Memorial, which provides
hospital services for Health Alliance patients with conditions that
can’t be treated in a clinic setting. Business-wise, Health Alliance, the biggest HMO in
the Springfield area, has been doing phenomenally well. On a grading scale of A to F, Weiss assigns Health
Alliance a C-minus, in part because it’s growing rapidly, says
Melissa Gannon, vice president of Weiss Ratings. “We’re very
cautious about companies that grow too fast — it’s been the
demise of many, if they grow too fast and don’t manage it
properly,” she says. “A C rating means, from our perspective,
that it’s OK but you want to keep an eye on it.” In the instance of Health Alliance, which Weiss gave
a D-plus in 2000, it appears to be a case of so far, so good. In 2000, Health Alliance collected $43 million in
premiums and realized a profit of $5 million, Gannon says. In 2004, the
most recent year for which figures are available, Health Alliance received
$97 million in premiums and made a profit of $18.5 million. That’s an
increase in profit margin from 12 to 19 percent. Capitalization was lower
in 2000 than it is today — one of the reasons Weiss has upgraded
Health Alliance, Gannon says. The growth appears to be genuine as opposed
to a case of swallowing other companies. “It looks like it’s
basically organic, purely by bringing in more providers and group
plans,” Gannon says. There have been signs of fierce competition between
Springfield Clinic and other health-care providers. For example,
Springfield Clinic was the lone dissenter last year when Prairie
Cardiovascular Consultants, whose physicians also operate Prairie Heart
Institute at St. John’s Hospital, won state approval to build a $14.6
million diagnostic center near Enos Park. The new center would generate
more than $4 million a year in profits, the proponents told the state. In a
letter to the state Health Facilities Planning Board, which must approve
certain categories of large capital expenditures by health-care facilities,
Springfield Clinic CEO J. Michael Maynard argued that the new center, which
would compete with the clinic’s cardiologists, would create an unfair
market share for Prairie. Springfield Clinic has since added three heart
specialists to its staff. Springfield Clinic last year also lost an expensive
legal battle with Central Illinois Allergy and Respiratory Services, which
the clinic accused of being of a medical mill that provided unnecessary
treatments while submitting exorbitant bills that ultimately came out of
the clinic’s bottom line [see Bruce Rushton, “Playing for
keeps,” Jan. 5]. CIARS physicians argued that the case was more about
competition than about quality of care. CIARS competes with Springfield
Clinic’s allergists and respiratory specialists, CIARS lawyers
argued, so the clinic was really trying to put CIARS out of business to
gain a competitive edge, a charge the other side denied. Although Health
Alliance brought the case, its partner Springfield Clinic was instrumental
in gathering evidence, and Mark Kuhn, the clinic’s chief
administrative officer, attended the arbitration hearing. No great outcry has surfaced against the
clinic’s newest expansion plans, which include 20,000 square feet of
space in a three-story structure over Sixth Street. The City Council
approved the project last week, three months after the clinic announced the
expansion and described the structure as a “skywalk.” The
clinic was prepared for a fight: At one point, its lawyer told the city
that without permission to build over the street, the project might not
proceed. Clinic executives bristle at the word “hardball.” “It wasn’t hardball; it was a matter of
practicality,” Bryant says. Kuhn confirms that the clinic was watching for
opposition that never materialized in any substantive way. “There was
no groundswell of opposition that would undercut the project,” he
says. “It was flattering, I guess.” Clinic executives who’ve decided to spend $30
million on a new building say that they have some ideas but aren’t
entirely certain what the new structure will house when it opens in about
two years. There will definitely be new ambulatory surgical facilities.
Opthamologists, dermatologists and allergists will also be assigned space.
“I don’t foresee any new specialties that we don’t
already have,” Kuhn says. Clinic executives say there’s enough business
for everyone. Some of the 40 new doctors the clinic expects to join are
already here and will sign up with Springfield Clinic, Kuhn says; others
will be recruited from outside the area. More than half of Springfield
Clinic’s patients come from outside the city, Kuhn says, and the
clinic believes that it can continue tapping that market. Although some
growth in Springfield’s health-care industry can be attributed to an
aging population that requires more doctor visits, Kuhn says, segments such
as preventative care that don’t rely on baby boomers are nurturing
the clinic’s growth. No one wants to be left behind. “We’re aware that other groups we compete
against are in a growth mode as well,” says Kuhn, who is well aware
of strong balance sheets at Memorial and St. John’s.
“They’re sitting on these big war chests.” Brian Reardon, spokesman for St. John’s, says
that the Springfield medical industry, which draws on more than 1.5 million
potential customers in central and southern Illinois, is relatively
friendly. “It’s competitive, but it’s not
like some other communities, where it can be fairly cutthroat and
impersonal,” Reardon says. For example, the two hospitals both supply
doctors to staff the regional trauma center at Memorial, which was
established seven years ago to serve 18 counties. “It’s a very rare model in the country,
but it’s worked out well,” says Johnson, the executive in
charge of marketing and planning at Memorial. Instead of being airlifted to
St. Louis or Chicago, critically injured patients come to Springfield.
Offering such services can be risky — after all, the trauma center
must accept auto-accident victims regardless of whether they have
insurance. But having a trauma center lends prestige and gets Springfield
medical services mentioned in countless news broadcasts. “It’s mainly to have patients come here
instead of someplace else,” Johnson says. “Just from a
reputation standpoint, trauma is a very high-profile service.” Some critics are alarmed by the apparent fiscal
health and business practices of the medical industry in Springfield and
elsewhere, particularly when it comes to nonprofit entities. The Champaign County Board of Review in 2003 revoked
tax-exempt status for Provena Covenant Hospital and Carle Foundation
Hospital, saying that they act more like for-profit businesses than
charities. The board determined that the hospitals charged uninsured
patients more than anyone else, provided charity care that totaled less
than 1 percent of total revenue, devoted large parts of their buildings to
for-profit ventures and used cutthroat collection tactics that included
suing people and threatening them with arrest and incarceration. The
Provena case is now before Illinois Department of Revenue director Brian
Hamer. Whichever
side loses has the right to appeal in court. In short, we may all find
ourselves in hospices before any decision becomes final. Illinois Attorney General Lisa Madigan this year
proposed legislation that would have required hospitals to spend at least 8
percent of their operating expenses on charity care. If they didn’t,
they faced sanctions ranging from payments into a fund to provide medical
care for the uninsured to loss of tax-exempt status. Not surprisingly, the
Illinois Hospital Association, which has contributed more than $1.6 million
to political campaigns in Illinois since 1999, including at least $250,000
to Gov. Rod Blagojevich in the past two years, opposed the measure. The
bill died in committee. Officials at St. John’s and Memorial say
they’re confident they can pass any review aimed at determining
whether they qualify as charities. In the case of Memorial, for instance,
the new building that the hospital is leasing to Springfield Clinic remains
on the property-tax rolls. Representatives of both hospitals say they
don’t necessarily oppose Madigan’s bill. It’s the 8
percent that’s at issue, as well as whether the amount hospitals
write off as bad debt can be counted as charity care. “I don’t think we have any real
concerns,” says Memorial Medical Center’s Mitch Johnson.
“We don’t have any stockholders to pay. We don’t send any
of our money out of town. All of the excess revenue over expenses is plowed
back into the organization.”Johnson and Reardon, spokesman for St. John’s
Hospital, both say large reserves are needed to ensure good interest rates
when issuing bonds to finance capital projects. If bad debt counts as charity care, nearly 20 percent
of St. John’s operating expenses are devoted to the needy, Reardon
says. “We take care of everyone who comes through our doors,”
he says. “Nobody is turned away for lack of financial
resources.” However, David Buysse, an assistant state attorney
general in Madigan’s special-litigation bureau, says that hospitals
opposed to the bill didn’t seem anxious to talk about alternatives to
the 8 percent figure, which he characterizes as a starting point for
debate. “We’ve made it clear that’s something we’re
very glad to discuss, not that we really expected during the course of
debate that someone would do that,” Buysse says. “No one ever
said 2, 3 or 4 percent would be better.” Hospitals, Buysse suggests, should do a better job of
quickly defining which patients are charity cases and forgoing attempts at
collection. Why, he asks, should hospitals go through the expense of trying
to squeeze money from uninsured folks without ability to pay who suffer the
stress of being hounded for money they don’t have? “The nature of the debate was very
heated,” Buysse says. Madigan isn’t giving up. Buysse says the
attorney general expects to back similar legislation next year. Madigan’s proposal has made for some strange
bedfellows. Chief among them is J. Patrick Rooney, a former insurance
magnate from Indianapolis who sold his health-insurance company two years
ago for a half-billion dollars. Now he’s in the business of selling
health-savings accounts in which folks sock away money to pay medical
expenses, eschewing HMOs and traditional insurance companies. Rooney, a
staunch Republican who’s backed the likes of Newt Gingrich, is no
Hillary Clinton, but he’s out to turn the health business upside
down, starting with nonprofit hospitals that charge uninsured people more
than they do patients whose insurance companies routinely negotiate steep
across-the-board discounts. The success of health-savings accounts depends on
reducing costs for the uninsured. Rooney, who is nearly 80 years old,
insists that money isn’t the only reason he’s crusading for
health-care reform. He quotes from the Bible and notes that Jesus taught
that what someone does for the least fortunate has a bearing on whether
that person makes it into heaven. “Everyone laughs, and that’s
all right to do,” he says. “I am making a practical investment
in my life after death. I won’t live forever. When I die, I want the
Lord to welcome me and say ‘Come on in, Pat.’ ” Rooney is behind an advertising campaign aimed at
pressuring the state to make hospitals behave like charities instead of
hardcore businesses. Given the moves to yank tax exemptions in Champaign
and Madigan’s proposed legislation, he says he sees a chance for real
change in Illinois. He accuses the state hospital association of flooding
Blagojevich’s campaign with cash in an attempt to influence the
decision on tax exemption for Champaign County hospitals. A radio blitz
publicizing the Provena case recently hit Springfield airwaves. Rooney was
less successful when it came to placing newspaper ads publicizing the
amount of money nonprofit hospitals have made. While lawmakers considered Madigan’s bill, the State Journal-Register, which
regularly runs ads from hospitals and other health-care providers, rejected
an ad from a Rooney-sponsored group called the Fairness Foundation. The ad
pointed out how much money is left over after nonprofit hospitals in
Illinois, including St. John’s, pay expenses. Darrell Williams, a senior partner in a Washington, D.C.-based
public-relations firm that is working with the Fairness Foundation, says
the paper said it was simply exercising its right to refuse ads from
anyone. “It seems rather obvious that the reason they
were uncooperative and were unwilling to run the ads is because one of the
hospitals listed in the ad is a Springfield hospital,” Williams says.
A woman who answered the phone Wednesday at the
newspaper's advertising department said managers who could comment were
either out of the office or in meetings. A message left at the publisher's
office was not returned.